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A view from the UK: Exchanging information and its consequences
Stephen Camm and Bosun Adebaki
www.pwc.co.uk
23 January 2014
PwC
23 January 2014
Introduction
PwC
23 January 2014
David Francis T: +44 (0) 7718 339033 [email protected]
Iain Sanderson T: +44 (0) 7764 902737 [email protected]
UK tax issues – our contact details
Stephen Camm Project Partner T: +44 (0) 7710 737703 [email protected]
Natalie Martin T: +44 (0) 20 7212 3978 [email protected]
Elizabeth Hartless T: +44 (0) 20 7804 9923 [email protected]
Bosun Adebaki T: +44 (0) 20 7213 2945 [email protected]
Jonathan Pitkin T: +44 (0) 20 7213 3957 [email protected]
Jonathan Preshaw T: +44 (0) 7921 108774 [email protected]
Ben Roseff T: +44 (0) 7715 211869 [email protected]
Ronnie Pannu T: +44 (0) 113 289 4021 [email protected]
Richard Clarke T: +44 (0) 20 7213 5778 [email protected]
Anthony Whatling T: +44 (0)20 7213 4576 [email protected]
Nick Moore Singapore T: +65 (0) 9782 5386 [email protected]
Richard Geldart Switzerland T: +44 (0) 7979 28997 [email protected]
Sam Eden Switzerland T: +44 (0) 7979 28999 [email protected]
PwC
23 January 2014
Agenda
1. Introduction 2. Global and UK context 3. UK FATCA - the basics 4. Relevant UK tax concepts 5. Critical issues for UK RNDs 6. Critical issues for Trusts 7. Conclusion
PwC
23 January 2014
Global and UK Context
PwC
23 January 2014
G5’s automatic exchange of information (AEOI) initiative 37 countries signed up to date:
1 UK 13 Czech Rep 25 Malta
2 Spain 14 Denmark 26 Mexico
3 Italy 15 Finland 27 Montserrat
4 France 16 Gibraltar 28 Netherlands
5 Germany 17 Greece 29 Norway
6 Anguilla 18 Guernsey 30 Poland
7 Australia 19 Iceland 31 Portugal
8 Belgium 20 Isle of Man 32 Romania
9 Bermuda 21 Ireland 33 Slovakia
10 BVI 22 Jersey 34 Slovenia
11 Cayman 23 Liechtenstein 35 South Africa
12 Colombia 24 Luxembourg 36 Sweden
37 Turks & Caicos
Confirmed their intention to use FATCA as a basis to develop a Common Reporting Standard (CRS) which will require tax authorities to share 2015 tax information automatically from 2016.
PwC
23 January 2014
UK’s fight against offshore tax evasion
• 2007 Offshore Disclosure Facility
- HMRC get offshore account information from five largest UK banks
- £400m yield from 44,000 disclosures; £91m yield from 12,000 enquiries
• 2009 New Disclosure Opportunity
- HMRC get offshore account data from over 300 further UK financial institutions
- £80m yield from 5,500 disclosures; £6m from 800 enquiries
• 2009 Liechtenstein Disclosure Facility
- 1721 registrations by September 2011
- £140m by March 2011
- Open to March 2016
• 2010 UK Swiss Agreement
- HMRC estimate yield of £4bn to £7bn
- HMRC to request information about 500 individuals per year
- HMRC to get details of top 10 destinations for money outflows
• 2013 UK FATCA
- IGAs with Crown Dependencies and Overseas Territories announced
PwC
23 January 2014
UK’s fight against offshore tax evasion
More serious consequences of non compliance
• New and increased tax penalties
- Up to 100% of tax lost normally
- Up to 200% of tax lost where undisclosed assets in selected tax havens
• Naming and shaming
- Where there is tax evasion and the loss of tax is £25k or more
• Managing Deliberate defaulters programme introduced
• More tax prosecutions
- Reputation damage
- “ a 5 year nightmare”
PwC
23 January 2014
PwC
23 January 2014
UK FATCA – the basics
PwC
23 January 2014
The agreements with these territories are non-reciprocal, meaning that UK financial institutions will not have any reporting obligations under the terms of the agreements.
These four agreements are reciprocal, meaning that UK Financial Institutions will have to provide data on financial accounts held by residents of these territories.
UK FATCA Overview
• The UK and the Isle of Man signed an IGA - the 'UK-Isle of Man Agreement to Improve International Tax Compliance' - on 10 October 2013. This was the first agreement of this type to be signed and published where neither party was the USA.
• Guernsey and Jersey signed IGAs with the UK on 22 October 2013 - the 'UK-Guernsey Agreement to Improve International Tax Compliance' and the 'UK-Jersey Agreement to Improve International Tax Compliance'.
• The British Overseas Territory of Gibraltar signed an IGA with the UK on 21 November 2013 - the 'UK-Gibraltar Agreement to Improve International Tax Compliance'.
• On 5 November the UK and the Cayman Islands signed the first IGA between the
UK and an Overseas Territory - the 'UK-Cayman Agreement to Improve International Tax Compliance'.
• Bermuda, Montserrat, the Turks and Caicos Islands and the British Virgin
Islands all signed IGAs with the UK in London during the week of the Joint Ministerial Council (w/c 25 November).
This means that any commitments for UK financial institutions will now commence as of 30 June 2014. Only accounts in existence on or after this date will be subject to reporting and 2014 will be the first year that reporting covers
• Following the announcement by the US of a delay of 6 months before the commencement of US FATCA on the 12 July 2013 the UK government has announced that this revised timeline will also apply to similar agreements signed with the CDs and OTs.
PwC
23 January 2014
Who has signed with the UK?
Local Legislation Local Guidance Common Reporting Standard
Jurisdiction Model Type Reciprocal?
Isle of Man Model 1 Yes
Guernsey Model 1 Yes
Jersey Model 1 Yes
Gibraltar Model 1 Yes
Cayman Islands Model 1 No
British Virgin Islands Model 1 No
Montserrat Model 1 No
Turks and Caicos Model 1 No
Anguilla Model 1 No
Bermuda Model 2 No
To follow?
PwC
23 January 2014
UK FATCA Summary
<
Scope / Legal Entity
Client Identification
and Due Diligence
Withholding Reporting
• The definition of a Financial Institution remains unchanged.
• Certain Financial Institutions exemptions available under the UK-US IGA are not available under UK FATCA.
• Some NFFEs considered as Active NFFEs under UK-US IGA are considered to be Passive NFFEs under UK FATCA.
• UK FATCA is based on identifying account holders tax residency. Citizenship is not relevant and therefore certain indicia are no longer considered relevant
• Pre-existing Cash Value Insurance
contracts with a value above $250,000 are now in scope for review subject to threshold elections.
• Pushed-back timeline for initial reporting – information in relation to reportable years 2014 and 2015 will be reported in 2016.
• There is no withholding under these agreements and references to withholding has been removed.
• There is no concept of non participation.
Whilst the ambition was that the agreements should closely follow the FATCA model 1 agreement, there are inevitable changes that needed to be made to reflect the fact that these jurisdictions’ tax on a residency basis.
PwC
23 January 2014
Scope / Legal Entity
Exemptions
• Non-profit organisation, such as UK registered Charities are treated as being deemed complaint under the US agreement
• The Local Client based exemption is available for Financial Institutions
• The exemption for non-profit organisation, such as UK registered Charities does not exist and therefore are not exempt from UK FATCA obligations.
• The Local Client base exemption is not applicable under the UK agreement and Financial Institutions will have an obligation to document and report reportable accounts.
UK FATCA FATCA
NFFEs
• Entities established for religious, charitable, scientific, artistic, cultural, or educational purposes are considered to be Active NFFEs under the US agreement.
• Entities established for religious, charitable, scientific, artistic, cultural, or educational purposes are considered to be Passive NFFEs under the UK FATCA agreement and will need to document and report any reportable controlling persons.
Registration • All Reporting Financial Institutions are required
to register directly with the IRS and obtain a GIIN
• Financial Institutions considered to be out of scope of US FATCA that are in scope for UK FATCA will not be required to register with the IRS but will have to produce their UTR number for reporting purposes.
Compliance • All FIs under an IGA will have 18 months before
significant non compliance can impact their FATCA status
• UK agreement removes any reference to the 18 months’ timeline that is referenced in the US agreement but requires that the relevant party applies its domestic law in a timely manner.
PwC
23 January 2014
Client Identification and Due Diligence
Indicia
• The UK-US agreement includes ‘place of birth’, ‘U.S. telephone number ‘and an ‘in-care-of’ or ‘hold mail’ address that is the sole address on file.
• The indicia has been modified in the UK agreements to confirm Tax residency as opposed to citizenship
• The UK agreement excludes ‘place of birth’, ‘U.S. telephone number ‘and an ‘in-care-of’ or ‘hold mail’ address that is the sole address on file as indicia for a reportable account.
• Standing instructions limited to non-depository accounts
UK FATCA FATCA
Pre-existing Cash Value Insurance
• No due diligence required for pre-existing Cash Value insurance Contracts and Annuity contracts
• Due diligence required for pre-existing Cash Value Insurance Contracts and Annuity contracts ,with a value above $250,000. (subject to threshold elections)
TIN
• Under the UK-US IGA, the reporting Financial Institution is required to collect the US TIN from the reportable account holder. The reporting Financial Institution is allowed to use the DoB in lieu of the US TIN until 2017
• The terms 'U.S. TIN' has been replaced by the terms National Insurance number or Social Security number .
• Under the UK agreement both parties have committed to requiring their respective Financial Institutions to obtain the National Insurance or social Security number for pre-existing individual accounts by 1 January 2017. This reflects the commitment in the US agreement where the UK has committed to requiring UK Financial Institutions to obtain the US TIN from Specified US persons.
NPFFI • Must identify and report (years 2015 & 2016)
NPFIs • No requirement to Identify NPFIs
PwC
23 January 2014
Indicia Comparison
UK-US Agreement UK-CD/OT Agreements
i. Identification of the account holder as a US citizen or resident
Identification of the Account Holder as tax resident in either the UK or other jurisdiction, as appropriate.
ii. Unambiguous indication of a US place of birth n/a
iii. Current U.S. mailing or residence address (including a U.S. post office box or U.S. “in-care-of” address)
Current mailing or residence address (including a post office box, “in-care-of” or “hold mail” address) in the UK or other jurisdiction, as appropriate.
iv. Current U.S. telephone number n/a
v.
Standing instruction to transfer funds to an account maintained in the US
For accounts that are not Depository Accounts the Reporting Financial Institution must also review electronically searchable data maintained by them for standing instructions to transfer funds to an account maintained in the other Party
vi. Current effective power of attorney or signatory authority granted to a person with a US address
Currently effective power of attorney or signatory authority granted to a person with an address in the other Party
vii.
An ‘in care of’ or ‘hold mail’ address that is the sole address the Financial Institution holds for the account holder. In the case of a Pre-existing Individual Account that is a Lower Value Account, an “in-care-of” address outside the United States shall not be treated as U.S. indicia
n/a
PwC
23 January 2014
Indicia “Cures”
UK-CD/OT Agreement Indicia Indicia “Cures”
i.
Identification of the Account Holder as tax resident in either the UK or other jurisdiction, as appropriate.
n/a
ii.
Current mailing or residence address (including a post office box, “in-care-of” or “hold mail” address) in the UK or other jurisdiction, as appropriate.
• A self-certification that the Account Holder is not resident in the other Party for tax purposes, and
a) certificate of residence for tax purposes issued by an appropriate official of the country or jurisdiction in which the Account Holder claims to be resident, or
b) the provision of a local tax identification number of the country or jurisdiction in which the Account Holder claims to be resident, and, a passport issued by the jurisdiction in which the Account Holder claims to be resident.
iii.
For accounts that are not Depository Accounts the Reporting Financial Institution must also review electronically searchable data maintained by them for standing instructions to transfer funds to an account maintained in the other Party
• A self-certification that the Account Holder is not resident in the other Party for tax purposes, and
• Documentary evidence, as defined on the next slide, establishing the Account Holder’s non-residence status.
iv.
Currently effective power of attorney or signatory authority granted to a person with an address in the other Party
PwC
23 January 2014
Documentary evidence
Acceptable Documentary evidence
i. A certificate of residence for tax purposes issued by an appropriate tax official of the country or jurisdiction in which the Account Holder claims to be resident.
ii. With respect to an individual, any valid identification issued by an authorised government body (for example, a government or agency thereof, or a municipality) that includes the individual’s name and is typically used for identification purposes.
iii.
With respect to an Entity, any official documentation issued by an authorised government body (for example, a government or agency thereof, or a municipality) that includes the name of the Entity and either the address of its principal office in the country in which it claims to be a resident or the country in which the Entity was incorporated or organised.
iv.
With respect to an account maintained in a jurisdiction with anti-money laundering rules that have been approved by the U.S. Internal Revenue Service in connection with a Qualified Intermediary agreement (as described in relevant U.S. Treasury Regulations), any of the documents other than a Form W-8 or W-9 referenced in the jurisdiction’s attachment to the Qualified Intermediary agreement for identifying individuals or Entities. The UK, Jersey, Guernsey, the Isle of Man, Bermuda, the British Virgin Islands, Cayman Islands, Gibraltar and the Turks & Caicos Islands have such an attachment in place. Montserrat does not have such an attachment in place.
v. Any financial statement, third-party credit report, bankruptcy filing.
PwC
23 January 2014
Example 1 – Trust managed by Cayman TrustCo
Cayman Resident TrustCo
ABC Trust
UK resident Settlor
REPORTING OBIGATIONS
Trustees / Cayman Trust to report to Cayman Government
Trustee
UK resident Beneficiaries
IS ENTITY A REPORTING FI? YES - “Investment entity” as is managed by an entity
that conducts as a business the investing, administration and management of funds on behalf of other persons
DOES ENTITY HAVE FINANCIAL ACCOUNTS? YES - Financial Accounts includes any equity interest in
the FI - Equity interest is considered to be held by any
person treated as settlor or beneficiary of all or a portion of the trust, or any other natural person exercising effective control over trust
PwC
23 January 2014
Example 2 – SPV managed by CaymanCo Manager
SPV Entity Limited (holds real estate)
Cayman Resident Company Manager
REPORTING OBIGATIONS
Professional Directors / Company Manager to report to Cayman Government
Professional Directors
UK resident Shareholders
IS ENTITY A REPORTING FI? YES* - “Investment entity” as is managed by an entity
that conducts as a business the investing, administration and management of funds on behalf of other persons
DOES ENTITY HAVE FINANCIAL ACCOUNTS? YES - Financial Accounts includes any equity or debt
interest in the FI - Equity interest includes shares
*Guidance to be released on possible exemption for an Investment Entity whose assets consist of non-debt direct interests in real property or land2
PwC
23 January 2014
UK FATCA – summary of the key points
• Similar but not exactly the same as FATCA
• UK FATCA signed 5 Nov 2013
• Impacts accounts/structures in existence at 30 June 2014
• Reporting to UK starts on 31 May 2016
• Reporting is on UK tax residents
• Alternative reporting regime can be adopted for UK tax resident non domiciled individuals (RNDs)
PwC
23 January 2014
Relevant UK tax concepts
PwC
23 January 2014
UK tax system – some basics
• UK tax year ends 5 April
• Self assessment system (or employer withholding)
• Tax returns submitted and tax paid by 31 January
• Random risk based audit of tax returns
• Penalties for incorrect tax returns can be up to 200% of tax
• UK tax residents pay tax on all worldwide income and gains
• UK tax resident non domiciles (RND) can pay tax on a remittance basis
• RNDs are considered high risk by UK tax authorities
PwC
23 January 2014
UK tax residence
• Affects how an individual is taxed. Statutory Residence Test (SRT) coded into UK statute from April 2013
• SRT considers person’s history of UK residence versus ‘connecting factors’ with the UK
- Part A: Automatic non-residence
◦ fewer than 46 days and NR in previous 3; fewer than 16 days and R for one or more of previous 3; full time employed overseas
- Part B: Automatic residence
◦ 183 days; full time employed; UK home for more than 30 days
- Sufficient ties test
◦ Family; Property; Work; Country
PwC
23 January 2014
UK domicile
Common law concept
• Focus is on where an individual has a settled intention to permanently reside
• 3 different concepts under which domicile may be determined:
• Domicile of origin – father at birth (or mother if not married)
• Domicile of choice – from 16 years of age
• Domicile of dependency – legally dependent
• Also concept of ‘deemed domicile’ purely for IHT if in UK for 17 of last 20 years
• UK resident individuals with a domicile outside the UK (‘RND’) can access remittance basis of taxation
PwC
23 January 2014
Remittance basis
• Only available for UKRNDs
• Income tax and Capital gains tax
- UK tax on all UK income/gains as they arise
- UK tax on non-UK income/gains only if remitted to the UK
- Annual decision – claim on TR each year but lose tax free allowances
• The Remittance Basis Charge (RBC) introduced in 2008
- £30,000 if UK resident in at least 7 of previous 9 UK tax years
- £50,000 if UK resident in at least 12 of previous 14 UK tax years
• Inheritance tax
- ‘Deemed domiciled’ for IHT purposes after 17 years of UK tax residence (UK IHT on worldwide estate)
PwC
23 January 2014
Two critical issues for RNDs
PwC
23 January 2014
RND – critical issue 1 Bank account segregation
• Tax rates in the UK vary between 18% and 45% dependent on ‘type’ of funds
• Remittances to the UK of non-UK funds may trigger tax charge – need to identify funds being remitted and tax consequences
• Clean capital vs. Income vs. Capital Gains vs. Mixed funds
Clean capital (FIRST)
Proceeds from capital
disposals (SECOND)
Income with tax credit (THIRD)
Income without tax
credit (FOURTH)
PwC
23 January 2014
RND – critical issue 2 Investing in UK situs assets
• As asset can only have one situs and treatment varies for income tax, capital gains tax and inheritance tax
• For securities, analysis may be required on an investment by investment approach
• Best to avoid any assets that have connection with the UK e.g.
- UK land and real estate property
- Bearer shares/ bonds physically located in the UK
- Shares/ securities issued by a company incorporated in the UK or whose share register is situated in the UK
- ISIN numbers beginning with ‘GB’ should also be avoided
PwC
23 January 2014
PwC
23 January 2014
Food for thought for Trustees
PwC
23 January 2014
Trusts with UK settlors and/or beneficiaries List of common problem issues
• Not recognising that all trust income is subject to UK tax in UK resident settlor interested trusts (i.e. settlor is a beneficiary)
• Not recognising IHT set up charge if UK settlor (20% asset value)
• Missing potential ten yearly IHT charges to IHT (6% asset value)
• Failing to segregate income and capital accounts where the beneficiary is a RND using remittance basis
• Triggering tax liabilities by remitting funds to the UK (directly or indirectly)
• Failing to properly record the capital gains tax and offshore income gains pools in respect of distributions to beneficiaries
• Trustees not being informed of beneficiaries becoming UK resident
• Tax advice not being refreshed to reflect legislative changes
PwC
23 January 2014
Conclusion
PwC
23 January 2014
Action points to consider
• Understand concepts of UK tax residence and domicile
• Identify UK tax resident clients asap
• Inform UK clients of new UK FATCA reporting regime before 30 June 2014
• Identify UK RND clients and consider alternative reporting regime
• Ensure current structures are not likely to have historic unpaid UK tax liabilities that will come to light when reporting begins
• Work on basis that UK RNDs will be subject to random tax audit over next few years
• If there are unpaid UK tax liabilities consider a tax disclosure
• Consult in confidence to consider the disclosure options
• Prepare for AEOI and understand the tax residence of all clients in a form that allows easy compliance with future reporting obligations.
• Be ready for the brave new world of 2016 !
PwC
23 January 2014
Unpaid tax liabilities – The options
Move funds out of Cayman Islands before 30 June 2014 1 Run
Wait for HMRC to investigate once they get information 2 Do Nothing
Meet PwC UK on free, confidential basis to discuss 3 Disclose
PwC
23 January 2014
David Francis T: +44 (0) 7718 339033 [email protected]
Iain Sanderson T: +44 (0) 7764 902737 [email protected]
UK tax issues - contact details
Stephen Camm Project Partner T: +44 (0) 7710 737703 [email protected]
Natalie Martin T: +44 (0) 20 7212 3978 [email protected]
Elizabeth Hartless T: +44 (0) 20 7804 9923 [email protected]
Bosun Adebaki T: +44 (0) 20 7213 2945 [email protected]
Jonathan Pitkin T: +44 (0) 20 7213 3957 [email protected]
Jonathan Preshaw T: +44 (0) 7921 108774 [email protected]
Ben Roseff T: +44 (0) 7715 211869 [email protected]
Ronnie Pannu T: +44 (0) 113 289 4021 [email protected]
Richard Clarke T: +44 (0) 20 7213 5778 [email protected]
Anthony Whatling T: +44 (0)20 7213 4576 [email protected]
Nick Moore Singapore T: +65 (0) 9782 5386 [email protected]
Richard Geldart Switzerland T: +44 (0) 7979 28997 [email protected]
Sam Eden Switzerland T: +44 (0) 7979 28999 [email protected]
This publication has been prepared for general guidance on matters of interest only, and does
not constitute professional advice. You should not act upon the information contained in this
publication without obtaining specific professional advice. No representation or warranty
(express or implied) is given as to the accuracy or completeness of the information contained
in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its
members, employees and agents do not accept or assume any liability, responsibility or duty
of care for any consequences of you or anyone else acting, or refraining to act, in reliance on
the information contained in this publication or for any decision based on it.
© 2014 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to
PricewaterhouseCoopers LLP which is a member firm of PricewaterhouseCoopers
International Limited, each member firm of which is a separate legal entity.